International Economics and Economic Policy

, Volume 7, Issue 4, pp 423–436 | Cite as

Exchange rate volatility, international trade and labour demand

Original Paper


The purpose of this study is to assess under what conditions exchange rate volatility generates a positive effect on an exporting firm’s labour demand. As the exchange rate volatility increases, so does the value of the export option, provided that firms are flexible with respect to international trade. Higher volatility increases the potential gains from trade and can increase the demand for labour. The firm’s trade flexibility can be interpreted as a real hedging strategy when financial markets are incomplete. In many newly industrializing countries and emerging economies financial markets are imperfect or risk sharing markets are just starting to develop at a rather slow pace.


Exchange rate volatility Trade Labour demand Flexibility Risk aversion Real option Real hedge 

JEL Classification

F16 F23 F31 F41 



We would like to thank our anonymous referee for very constructive and helpful comments. Furthermore we thank the editor of this Journal (P.J.J. Welfens) and Carsten Eckel for helpful discussions.


  1. Bacchetta P, van Wincoop E (2000) Does exchange rate stability increase trade and welfare? Am Econ Rev 90:1093–1109CrossRefGoogle Scholar
  2. Bacchetta P, van Wincoop E (2005) A theory of the currency denomination of international trade. J Int Econ 67:295–319CrossRefGoogle Scholar
  3. Battermann HL, Broll U, Wahl JE (2008) Utility functions of equivalent form and the effect of parameter changes on optimum decision making. Econ Theory 34:401–414CrossRefGoogle Scholar
  4. Bini-Smaghi L (1991) Exchange rate variability and trade: why is it so difficult to find any empirical relationship? Appl Econ 23:927–936CrossRefGoogle Scholar
  5. Black F, Scholes M (1973) The pricing of options and corporate liabilities. J Polit Econ 81:637–654CrossRefGoogle Scholar
  6. Broll U, Clark E, Lukas E (2010) Hedging mean-reverting commodities. J Manag Math 21(1):19–26Google Scholar
  7. Broll U, Eckwert B (1999) Exchange rate volatility and international trade. South Econ J 66:178–185CrossRefGoogle Scholar
  8. Broll U, Eckwert B (2006) Transparency in the foreign exchange market and the volume of international trade. Rev Int Econ 14:571–581CrossRefGoogle Scholar
  9. Broll U, Wahl JE, Zilcha I (1995) Indirect hedging of exchange rate risk. J Int Money Financ 14:667–678CrossRefGoogle Scholar
  10. Caves RE (2007) Multinational enterprise and economic analysis. Cambridge University Press, CambridgeCrossRefGoogle Scholar
  11. Chen Y, Funke M (2002) Exchange rate uncertainty and labour market adjustment under fixed exchange rates, working paper 779. CESifo, MünchenGoogle Scholar
  12. De Grauwe P (2007) Economics of monetary union, 7th edn. Oxford University Press, OxfordGoogle Scholar
  13. Dellas H, Zilberfarb BZ (1993) Real exchange rate volatility and international trade: a re-examination of the theory. South Econ J 59:641–649CrossRefGoogle Scholar
  14. Doehring B (2008) Hedging and invoicing strategies to reduce exchange rate exposure: a euro-area perspective. Economic papers 299. European Commission, Economic and Financial AffairsGoogle Scholar
  15. Franke G (1991) Exchange rate volatility and international trading strategy. J Int Money Financ 10:292–307CrossRefGoogle Scholar
  16. Friberg R (1998) In which currency should exporters set their prices? J Int Econ 45:59–76CrossRefGoogle Scholar
  17. Friberg R, Wilander F (2008) The currency denomination of exports—a questionnaire study. J Int Econ 75:54–69CrossRefGoogle Scholar
  18. Funke K, Koske I (2008) Does the law of one price hold within the EU? A panel analysis. Int Adv Econ Res 14:11–24CrossRefGoogle Scholar
  19. Gagnon JE (1993) Exchange rate variability and the level of international trade. J Int Econ 34:269–287CrossRefGoogle Scholar
  20. Kawai M, Zilcha I (1986) International trade with forward-futures markets under exchange rate and price uncertainty. J Int Econ 20:83–98CrossRefGoogle Scholar
  21. Krugman PR (1989) Exchange rate instability. MIT, CambridgeGoogle Scholar
  22. Lane PR (2001) The new open economy macroeconomics: a survey. J Int Econ 54:235–266CrossRefGoogle Scholar
  23. McKenzie M (1999) The impact of exchange rate volatility on international trade flows. J Econ Surv 13:71–106CrossRefGoogle Scholar
  24. Merton R (1973) Theory of rational option pricing. Bell J Econ 4:141–183CrossRefGoogle Scholar
  25. Obstfeld M, Rogoff K (1995) Exchange rate dynamics redux. J Polit Econ 103:624–660CrossRefGoogle Scholar
  26. Sandmo A (1970) The effect of uncertainty on saving decisions. Rev Econ Stud 37:353–360CrossRefGoogle Scholar
  27. Sandmo A (1971a) On the theory of competitive firm under price uncertainty. Am Econ Rev 61:65–73Google Scholar
  28. Sandmo A (1971b) Portfolio theory, asset demand and taxation: comparative statics with many assets. Rev Econ Stud 44:369–379Google Scholar
  29. Schmidt CW, Broll U (2009) Real exchange rate uncertainty and U.S. foreign direct investment: an empirical analysis. Rev World Econ 145:513–530CrossRefGoogle Scholar
  30. Sercu P, Uppal R (2003) Exchange rate volatility and international trade: a general equilibrium analysis. Eur Econ Rev 47:429–441CrossRefGoogle Scholar
  31. Varian HR (1992) Microeconomic analyses, 3RD edn. Norton, New YorkGoogle Scholar
  32. Wong KP (2007) Optimal export and hedging decisions when forward markets are incomplete. Bull Econ Res 59:67–81CrossRefGoogle Scholar
  33. Wong KP (2008) Does market demand volatility facilitate collusion? Econ Model 25:696–703CrossRefGoogle Scholar

Copyright information

© Springer-Verlag 2010

Authors and Affiliations

  1. 1.Fakultät für WirtschaftswissenschaftenTechnische Universität DresdenDresdenGermany

Personalised recommendations